Tuesday, October 26, 2010

California could feel Spain's pain

This article from the Orange County Register is by Dr. Gabriel Calzada, professor of applied environmental economics in Spain and lead author of a 2009 study detailing the economic costs of Spain's experiment with the green economy.

Barring voter intervention, Californians will soon suffer under full-blown European-style energy policies. These include mandated greenhouse gas emission reductions of a sort achieved to date only through economic collapse, and fantastic mandates for renewable energy that so far have caused economic hardship elsewhere.

Oddly, despite these policies having been tried throughout Western Europe at great cost and for no discernible environmental benefit, Californians are told their laws are the "world's first".

It is not because policies similar to those in Assembly Bill 32 have yet to be tried that you hear no shining examples of their success. The "world's first" pretense is likely employed to avoid discussing the harm the policies have already caused elsewhere.

A similarly odd phrase, "California must be a leader," is now invoked against Proposition 23, the Nov. 2 ballot measure to delay these policies until the state's economy significantly recovers.

Yet while promoting similar steps at the national level, President Barack Obama had serially directed Americans to examine several European experiments in orchestrating the "green economy." Chief among his examples was Spain. Whether or not related to what I and two other researchers found after taking this advice, Mr. Obama no longer directs Americans to gaze at our economic wonder.

In Spain we found that the economy, in fact, lost a net 2.2 jobs for every "green job" the state claimed credit for, just in an opportunity cost. That is, the private sector creates jobs much more efficiently than the state – less expensively and dedicated to produce goods and services that people really demand. We found the private section would have created that many more "real" jobs had the money not been removed and put toward politically divined ends. Think "stimulus jobs."

A Power Point presentation leaked from the Spain's socialist Zapatero government earlier this year actually suggests that the loss in terms of jobs is currently even higher.

In Spain we also found that green jobs mostly (9 out of 10) were temporary. That is, they are principally installation jobs. In Italy, researchers found that 4.8 jobs were lost for each green job created.

In Germany – another example frequently cited by Mr. Obama – researchers with the state-funded think tank RWI-Essen concluded that "Germany's promotion of renewable energies is ... a cautionary tale of massively expensive environmental and energy policy that is devoid of economic and environmental benefits."

Therefore, the claims that green-economy policies will create jobs are at once inherently true and patently false. They are true in that, of course, any time the state mandates that something be done, someone must be employed to do it.

Assume a state mandates a certain percentage of electricity come from particular sources – say, windmills, or running on treadmills – or transportation be of a certain variety – hybrid vehicles, or horse-drawn. No one disputes that this will create jobs in the windmill/treadmill installation and buggy-whip industries.

On net, however, green-economy mandates are job killers. In addition to jobs lost through opportunity cost, jobs are lost from the tougher economic environment for manufacturing in places with green-energy mandates. These make energy prices "necessarily skyrocket," to quote President Obama about cap and trade. For California, this would culminate years of creeping, heavy-handed mandates mimicking Europe.

For example, at least one European steel maker, Spain's Acerinox, exported its growth to South Africa, and to Kentucky, where it added 175 manufacturing jobs because, according to its then-CEO, it was uneconomic to invest in manufacturing facilities under the cap-and-trade, renewable energy mandates and other green economy schemes Spain adopted.

Rather unlike Europe, however, Californians are engaged in a debate over whether to re-take control of policies that many feel their political class has demonstrated an inability to handle responsibly. While opponents of this want to focus attention on the identity of employers who support Prop. 23, what are their own interests? Do their obvious financial stakes not indicate they stand to benefit from the very predictable outcome of AB32? When the state robs Peter to pay Paul, it can count on Paul's enthusiastic support. That is surely the case here.

With this referendum California's voters have a privilege not available to those in other areas subjected to the state-imposed green economy. The outcome is now up to them. But it should be determined on the basis of facts, not misleading talking points. And the facts are pretty clear of how these policies have worked out where they have been tried.

The "green economy" is supposed to be a win-win situation, as massive subsidies for renewable energy sources and other "clean" technologies would help both the environment and the economic recovery. The facts on the ground tell a different story, though. In Italy, for example, we calculated that each green job comes at the expense of 4.8 "dirty" jobs. That's an awful lot of waste for a movement that's meant to be all about efficient resource use.

Understanding the costs and benefits of ecological policies is particularly relevant for Italy, a country that already paid more than its share of offerings to the church of environmentalism when it shut off its four nuclear plants after a referendum in 1987. So before more public monies are doled out for measures to supposedly save the planet as part of the European Union climate deal, let's look at the consequences.

To this end we developed a study to evaluate the effectiveness of green subsidies in job creation. The question we tried to answer is: If the resources currently invested to promote renewable energy were invested in other economic sectors, would more or fewer people have work?

What's often ignored is that the creation of green jobs through subsidies and regulation inherently leads to the destruction of job opportunities in other industries. That's because any resource forcibly taken out of one sector and politically allocated in favor of renewable energy cannot be invested elsewhere. In our country, green energies are subsidized through a premium that every electricity consumer pays on his electricity bill (about 4.3% of the average bill). That helps to make Italy's electricity costs among the most expensive in Europe. In particular, big industrial consumers pay the most for electricity in Europe (at least 25% above the EU average in 2008, according to Italy's energy regulator).

In order to assess the net balance on Italian employment, we have estimated the number of green jobs expected to be created by the subsidies that have already been granted or committed. To do so, we have assumed that, by 2020, Italy will reach its "maximum potential" for wind and photovoltaic power, as defined by the Italian government in 2007, when Green Party leader Alfonso Pecoraro Scanio was also Italy's environment minister. Using what we see as inflated estimates, from various sources, of already-existing green jobs, we take between 9,000 and 26,000 jobs in wind power, and between 5,500 and 14,500 in photovoltaic energy, as our starting point. From there, we have calculated that thanks to the subsidies Rome has promised, the number of people working in the green economy will rise to an aggregate total of between 50,000 to 112,000 by 2020. However, most of those jobs—at least 60%—will be for installers or other temporary work that will disappear once a photovoltaic panel, or a wind tower, is operative.

Italy's public cost for such subsidized jobs will peak at around €6 billion per year in 2020, an amount that we acknowledge may be slightly overstated because we didn't consider an already announced but unspecified reduction of the feed-in tariff for photovoltaic power. Alas, it is consistent with the estimates from Italy's energy regulator, which foresees that all green energy subsidies (of which wind and solar remain the most important) will account for about €7 billion per year in 2020.

Finally, we have calculated the aggregate amount of public money that will be spent on wind and solar power until 2035 and 2040, when the last green certificate for wind power and the feed-in tariff for photovoltaic power, respectively, will expire for the capacity installed in 2020. Between 2000 and 2040, all subsidies for wind and solar power will come to roughly €63.6 billion. That allowed us to calculate that consumers will be forced to spend, on average, between €566,000 to €1.26 million per green job. This compares to the average "stock of capital," or cost per job, of €112,500 in the industrial sector and €163,200 in the whole economy, according to the Italian Institute of Statistics.

So one green job costs on average as much 4.8 jobs in the entire economy, or 6.9 jobs in the industrial sector. The same amount of subsidies that have already been given or committed could produce nearly five times as many jobs if allowed to be spent by the private sector elsewhere in the economy.

Our results are largely consistent with the evidence provided by Professor Gabriel Calzada of the Universidad Rey Juan Carlos, who found that in Spain, one green job costs on average as much as 2.2 "dirty" jobs. The reason why the Italian figure is more than twice as high is mostly because Italy, unlike Spain, is technology importer, not a producer.

Our figures only seem to confirm what is intuitive: That the green economy may be very profitable for those who receive the subsidies, but that they are detrimental to the overall economy. Environmentalists and politicians keep speaking about the supposed "double dividend" of renewable energy. Subsidizing green sources may or may not deliver an environmental benefit, but our study suggests that if there is a payoff, it doesn't come for free.

Mr. Lavecchia is fellow of Istituto Bruno Leoni, an Italian think tank. Mr. Stagnaro is research and studies director of Istituto Bruno Leoni.